According to the theory of purchasing power parity,in the long run
A) the nominal exchange rate should equal the domestic inflation rate.
B) the domestic inflation rate should equal the foreign inflation rate.
C) the real exchange rate should equal 1.
D) the real exchange rate should equal the domestic inflation rate divided by the foreign inflation rate.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) suggests that in the long run, the real exchange rate should equal 1, meaning that identical goods should cost the same in different countries when prices are expressed in a common currency.

According to the Theory of Purchasing Power Parity,in the Long